By Nina E. Olson
Nina Olson is the Executive Director of the Center for Taxpayer Rights, a 501(1)(c)(3) organization dedicated to advancing taxpayer rights in the US and internationally. She served as the National Taxpayer Advocate from March 2001 through July 2019. We are pleased to welcome her as a contributor to Procedurally Taxing. Keith, Les, Christine and Stephen
Over the past four and half months since my retirement as National Taxpayer Advocate, I have been a bit busy. I founded a nonprofit, the Center for Taxpayer Rights, which is dedicated to advancing taxpayer rights in the United States and throughout the world. I’ve visited with the Independent Greek Revenue Authority and learned about their new Dispute Resolution Function; I’ve attended a conference on taxation and Sustainable Development Goals in Pretoria, South Africa, and finalized the agenda for the 5th International Conference on Taxpayer Rights, to be held in Pretoria on September 30 and October 1 of 2020. I’ve participated in workshop in Sweden with 10 or so anthropologist whose work concentrates on taxation. I went to Baku, Azerbaijan, where I am assisting the tax agency in establishing its Taxpayer Ombudsman office. And finally, I’ve just come back from a visit to Vienna, Austria, where I attended a retreat with Erich Kirchler of the University of Vienna and his PhD students in the Department of Applied Psychology. I’ve felt like a sponge, absorbing all sorts of information and using it to reflect on my past 18 years as National Taxpayer Advocate, along with my earlier 26 years in practice.
In the midst of all this travel, I attended several US-based conferences, and also read press reports about speeches and remarks by IRS leaders. Last week I participated in a panel about developments in IRS Collection activities at the American Bar Association’s National Institute on Criminal Tax Fraud/Tax Controversy. There is clearly a lot going on, with increased hiring of Revenue Officers (ROs), and the IRS utilizing teams of ROs to go out to geographic areas where data indicate there are clusters of problematic collection cases – aged accounts with large dollar amounts of trust fund payroll taxes owed, attributable to many quarters. On the panel, the Deputy Commissioner of SBSE referred to these taxpayers as “stealing” from …. not sure from whom, the government? The IRS? Other taxpayers? All of the above? This refrain of stealing was repeated several times.
Now, I fully support the hiring and deployment of additional ROs. In fact, throughout my career as a tax practitioner and as the National Taxpayer Advocate, I have believed that an experienced RO, who has witnessed myriad forms of human behavior and is really curious about what makes taxpayers do what they do, can be incredibly successful in resolving taxpayer arrears and bringing noncompliant taxpayers into compliance. I’ve directed research studies that show, empirically, that ROs are more successful in the field collecting employment taxes than the Automated Collection Function (ACS), despite the fact that the IRS continues to funnel employment tax accounts through the ineffective ACS before assigning these cases out to ROs, so by the time the RO gets a case, it is already very old and very large and very intractable.
The IRS Collection Field Function used to talk about “Cause, Cure, Compliance” – that is, to successfully address an account in arrears, you have to first identify the cause of the noncompliance – did the taxpayer have some event in her life that caused her to get behind, whether it was a recession, a natural disaster, a physical illness, embezzlement by an employee, or simply trying to keep a struggling, unsuccessful business afloat? Or, was the taxpayer someone who, in the words of the IRS official, was intent on stealing from the public fisc? I maintain you will know those folks when you see them; it is not hard to identify those folks; what is difficult and challenging is remembering that everyone else is not like them – they have other reasons for finding themselves in an arrears situation, even with large arrears.
Once you’ve identified the cause, you have to apply this causal analysis to come up with an appropriate cure of the noncompliance – an installment agreement, an offer in compromise, placing the account in currently not collectible (CNC) status, or moving to more enforcement-oriented approaches such as liens, levies, seizures, reducing liens to judgment or even seeking an injunction.
Finally, the “cause/cure/compliance” approach requires you to consider how all the “cure” actions would affect future compliance, because, really, the whole goal of tax administration is to promote voluntary compliance, first, because it is the right thing to do, and second, because it eliminates future problems and instills a habit of compliance, thereby saving the taxpayer angst and the government resources.
These three components of a rational and humanistic collection strategy are deeply interconnected. If you do not correctly identify the cause of the noncompliance, you risk applying the wrong cure. Sure, you may get revenue, but you will make an enemy of the taxpayer, and you will certainly not achieve future compliance going forward. You will just get some dollars, period. If “revenue collection” is the sole measure of your success, well, you succeeded. But tax administrations, and tax research, today, recognize that revenue collection is a short term measure of performance. It must be balanced with a measure of long term voluntary compliance. Did the taxpayer change his or her behavior and adopt a norm of voluntary compliance going forward, or must the tax administration continue to address the taxpayer’s repeated noncompliance in short-term and resource-intensive approaches?
I contend the IRS’s thinking about tax administration continues to be mired in short term thinking because it is inherently incurious about human behavior – why people do the things they do. So its approaches to curing noncompliance are often overreaches – applying collection tools that are coercive where a much lighter touch would bring about the desired compliance.
Why should an agency care about a mismatch between cause and cure? Simply put, there is strong evidence that respect for the tax agency is strongly linked to taxpayers’ perception that the government is using its awesome collection powers legitimately and not coercively; this perception in turn builds trust in the agency and creates an environment in which people who are in noncompliance with the tax laws are more comfortable with coming forward and working with the agency because it has the reputation for using power legitimately. And this approach reassures compliant taxpayers that the agency will in fact address noncompliance in others, but through legitimate, not abusive, uses of its power.
So let’s bring this full circle. How does one apply this approach to the taxpayers who have multiple periods of employment taxes in arrears, over time amounting to large dollar balances with the accruals of penalties and interest? Well, first we look at the cause of the debt accrual. Was this taxpayer playing cash roulette by using the payroll tax trust funds to keep a failing business afloat? If so, is this business alive today or has it long since collapsed? If the business is alive today, is it in compliance with its current payroll tax obligations? If the business collapsed, has the taxpayer created another business that is incurring tax debts, or is the taxpayer now a wage-earner (or retired) and therefore not a compliance risk at all. Did the taxpayer have a catastrophic event in his life – a heart attack, a divorce, a natural disaster – that caused the noncompliance and then the taxpayer just continued on under the radar, afraid to resurface because it might trigger aggressive collection actions. Or, is the taxpayer one of those individuals at the far end of the compliance spectrum, who views compliance as a “Catch me if you can” game? Finally, where was the IRS in all this? Did it shelve the taxpayer’s case, or stick it in the queue, doing nothing with it for years, not even sending out monthly bills like every other creditor in the world does? As a taxpayer practitioner, and as the National Taxpayer Advocate, it was important to me to understand the underlying causes – the typology of noncompliance, if you will, that Les Book has written so eloquently about here. Only then could I fashion a strategy for (1) addressing the immediate problem before us and (2) bringing that taxpayer (if possible) into future voluntary compliance.
On my panel last week, I didn’t hear a lot about understanding the causes of noncompliance and tailoring its compliance approaches to those causes. In fact, I didn’t hear a lot about changing compliance norms and increasing future voluntary compliance. What I did hear was a lot of talk about increased revenue – how such and such an approach brought in more dollars. Only time will tell whether these short-term approaches are actually effective in increasing voluntary compliance, the holy grail for tax administration. There is so much low-hanging fruit around from years of poor compliance strategy at the IRS that it is not surprising that, once it starts “touching” people, it gets dollars. The question remains whether these are dollars that should have been collected at all (under the taxpayer protections Congress has enacted or the IRS has adopted) and whether the IRS has actually reinforced noncompliance norms through the application of unnecessary enforcement measures, or promoted longterm voluntary compliance through the legitimate use of its power.